It’s always gratifying to have spare cash on the side. Having cash flow outside of your salary can prop up your net worth, and also provide you with some peace of mind and mental clarity. For sure, you have encountered the words “passive income”, and that real estate investing is a good source of such.
Before we dive in, let us clarify what passive income is. Passive income is money you earn from a source that does not require your active participation. It is money you earn without a daily regular time investment. There is little effort involved, and usually it is your money working for you instead of you working for money. Passive income could be derived from a variety of investments such as stocks, bonds and real estate, just to name a few.
Of course, having steady passive income is immensely beneficial. It can accelerate the growth of your retirement fund, and expedite your efforts to reach your financial goals and financial freedom. So the question is, how can we create passive income from real estate? Here are a few options:
1. Long-Term Residential Rentals
Creating passive income in real estate usually comes in the form of long-term residential rentals. This means that you buy one property and rent it out to tenants. Managing rental properties can be an outstanding source of monthly cash flow. But keep in mind that being a landlord is not a totally passive way to earn income, since it behooves you to exert consistent effort. Tenants shall assume that it is incumbent upon you to regularly keep your property in good shape through renovations and upgrades. In addition, this requires you to spend time researching options about properties and advertising your own investment property to potential renters.
Researching about properties in your local area is one of the most important tasks you should perform before you even think about purchasing a rental property. Of course, you need to scout first the available rental properties in your area, so that you know the baseline of what you should offer to tenants. Also, researching helps you come up with the right monthly rental price that you can reasonably charge. You would definitely scare off potential tenants if you demand a payment that is too far away from the prevailing rates in your area. You also need to understand that amenities, location, and property size will also be factors to consider in how much rent you can expect to charge monthly.
You should also keep abreast of the laws that you should adhere to as a landlord. Many municipalities have housing laws that regulate and set the bounds on what a landlord can and cannot do. If you violate such laws, you could jeopardize yourself legally. Some important laws a landlord should inculcate are the right to privacy laws and laws that pertain to eviction processes.
Once you have spent enough time researching on housing and market laws, you can now choose a property. Choose a property that is affordable and that is in an area where the rent that you can charge exceeds the monthly mortgage that you are paying. If you are using mortgage loan to finance a property, it would be better if you also study the current interest rates.
Aside from the monthly mortgage payments, another thing that should influence the rent you charge is the property taxes. Keep in mind that as a landlord, you are responsible for paying the real estate property tax, even if you do not reside in the property you are renting out. As a landlord, you should also consider the regular maintenance expenses of your property. A good rule of thumb for estimating yearly maintenance expenses is computing 1% of your property’s total value. If the apartment you are renting out is worth Php 5 million, you can expect to pay around Php 50,000 worth of yearly maintenance expenses. After you calculate your total monthly and annual expected expenses, you can then decide on a final monthly rental price.
Once you buy your rental property in cash or through mortgage, it is time to start advertising to potential tenants. You can do this online through various social media platforms, aside from the well-known real estate database websites. Do not forget to include your contact numbers so that interested parties can reach out to you promptly.
When the applications are on your table, carefully examine each candidate tenant. When you find the right tenant, ask him or her to sign a lease agreement. A lease agreement specifies things such as the tenant’s monthly rent, how long they may live there and what utilities they must cover. You can scour the internet for lease agreement templates or you can hire an attorney to compose one for you. Remember that a lease agreement is a legally binding document for both the landlord and the tenant. Verify that all information is correct before you put your name on the dotted line.
Now that you have your tenants, the only thing that remains to be done is being a great landlord. Be responsive to their maintenance requests in a timely manner, and make sure that you are crystal clear with them about the expectations regarding rental fees. If you respect your tenants and treat them with dignity, chances are they shall take good care of your property.
2. Short-Term Rentals
Short-term rentals are the most attractive and obvious choice for tourists nowadays. A popular example is the vast array of Airbnb rentals in almost any location. Short-term rentals can give more of a relaxed and laidback feel that a hotel usually does not provide. A Short-term rental property is an ideal mode to generate passive income if your property is located in a sought-after vacation spot.
One advantage of short-term rentals is you are not tied to the same tenant. Even if you have the most rigorous screening process available for tenants, you can end up with a renter who does not pay rent on time and who is not the ideal type of personality for your property. This possibility can be minimized, if not eliminated, with short-term rentals. Your property just becomes a revolving door and a transient home for tourists and travellers. Also, you can immediately put up the property for sale if you wish, without having to worry about evicting the tenant.
Also, you can dictate the availability of your short-term rental property. If you intend to use your vacation home for yourself and for your loved ones, you can just choose to not rent it out for a certain period of time. This is especially satisfying if your property is a mountain lodge, or a beachfront condominium.
In addition, you can charge considerably higher rental fees for short-term rentals compared to the long-term ones. Vacation homes are usually advertised at higher prices, and you can have great latitude over the nightly and weekly rates that you demand from customers. This way, you can collect cash at a faster rate, and your income is significantly larger in a shorter period of time.
One underrated benefit of short-term rentals is it makes it easier for the owners to keep up with the repairs. Since you are forced to inspect the property every time a new guest checks in, you are more ready to spot the items that are in need of urgent repair. This is a benefit not seen in long-term rentals, where renters can create damage within the property without your immediate knowledge.
3. Pre-selling and Re-selling
Pre-selling and Re-selling are popular ways to earn passive income in real estate if you own a condominium unit. For developers, pre-selling means they are offering their units to buyers even before the entire construction process of the condominium starts. This means that units are sold prior to their completion.
Since the unit is still in construction, the prices of a pre-selling unit are much cheaper compared to the finished ones. As a developer, you can offer enticing payment options such as low or zero down payment schemes, aside from formulating flexible payment plans. And since the market value of the property is lower before the construction of the units, the pre-selling units can zoom upwards in value after a few years.
Developers can also reward those that buy their pre-selling units by giving them first crack at picking from their inventory of properties. Buyers of course shall choose those units with the best location and amenities.
For experienced investors, a pre-selling unit and the flexible payment terms can buy them the luxury of time to leverage their funds. They can take advantage of the very low entry points to leverage bank loans to acquire more property to their portfolio via good debt that will help build their credit record while improving the potential monetary payoffs.
On the other hand, reselling means the investor sells a property that he previously owned at a price that is larger than its original cost. With a few touch-ups, he can enlist his property at a higher price, since he is reselling a product that is an improved version of its former self.
The reseller should afford its prospective buyers the chance to personally view and inspect the unit before the buyer can commit to purchasing the property. This involves welcoming them and allowing them to view not just the layout, but the finishing, and the views from the window.
For the reason that the unit is completed, refurbished, and ready for use, the investor can work quickly with the buyer to schedule the move-in date. Also, the reseller can disclose more detailed information to the buyer, since he has had previous personal experience living inside the property. He can explain to the buyer all the problems and issues encountered during construction of the property, including important data about the building history, neighbors, and even the current market value of the unit.
4. Real Estate Investment Trust (REITs)
One common misconception about real estate investment is the large capital outlay needed, which drives potential investors away due to lack of funds. Also, recurring costs such as taxes, security, repairs are added headaches. To make it easier to would-be investors and capitalists, the Republic Act 9856, or the REIT (Real Estate Investment Trust) Act of 2009, was enacted into law by the Philippine Government, establishing REITs in the country. Its accompanying IRR (Implementing Rules and Regulations) was promulgated by the Securities and Exchange Commission on May 13, 2010.
Real Estate Investment Trusts allows the public to own shares of real estate properties such as house and lot, rent to own homes, housing developments and other big properties without having to worry about shelling out oodles of money and handling the day-to-day operations of these entities. Through REITs, small investors such as OFWs and normal middle class Filipinos can enter the real estate market with minimum capital. The promise or hope of lucrative return of investment is still there despite the low barrier to entry, as some REITs offer regular dividend income aside from income by way of normal stock gains.
In some aspects, REITs are similar in mutual funds. For example, the OFW investor buys shares of these companies. The fund managers within the REIT Company can in turn use the collected funds from the investors to purchase assets that can drive up the value of the shares.
As for the REITs, those assets are offices, malls, warehouses, hospitals, and other infrastructures related to real estate. Therefore, when you want to cash in or withdraw your investment, you need to trade the stocks from the exchange so you need to utilize a qualified stock broker. In the same manner, with mutual funds, you just have to find and proceed to a mutual company if you desire to invest or sell.
Aside from the minimum capital required for investing in REITs, REITs also offer less stress since you will not be involved in the day to day operations of managing the properties. Depending on the REIT, investors can also be qualified to receive dividend income. The value of the REIT stock may also increase over time. The REIT assets are already tangible and passive income-generating. You can benefit from the expertise of the REIT fund managers, instead of trading on your own in the stock market. An REIT company can also offer diversity due to its array of infrastructure projects. One need not worry in terms of transparency, since REIT companies are required to disclose its financial status to shareholders. REITs can be traded daily, giving you a chance to liquidate your investments any time you wish. As an OFW investor, you can also benefit from tax-free passive income in real estate from 2020 onwards.
On the flip side, REITs can be subject to tax hikes on certain real estate properties under its portfolio. High vacancy rates also adversely affect REIT income. The stock growth may be slower, due to the fact that most of its income is not reinvested when it is instead awarded to shareholders as dividends. Other risks such as high interest rates, debts and other unfavorable circumstances can undermine and diminish REIT income, not to mention the other management fees due to its employment of fund managers.
5. Flipping
What happens when you flip a house? Flipping a house means you buy one, make or provide renovations, updates and add-ons, and then finally sell it—all within a short period of time. Flipping a house is very enticing since it is a faster endeavor than say, renting out a house or condo unit for a few years. Within a few months, you could offer up the house for sale on the market and optimistically cross your fingers and earn a tidy profit. However, just like other investments, there is a chance that you could lose money if there are not enough buyers to your liking.
In house flipping, the secret to immense profits is buying low, or buying a house that is below market value. If you cannot do this, chances are you would not even make noticeable income. Before immersing yourself into house flipping, make sure that you consult a real estate agent who is very knowledgeable about the potential of the houses that you seek to flip for profit.
Also, house flipping is not as glamorous as the housing makeover television shows make it out to be. But if you are a sucker for hands-on work, flipping should be a good fit for you. Just remember that your budget and time for flipping should be elastic and flexible, since housing renovations are almost always more costly than even your most liberal estimate.
In the final analysis, real estate has stood the test of time as a good source of passive income. And as discussed here, you have a plethora of options through which you could squeeze regular revenues out of your property. If you are looking for an affordable house and lot or real estate property from which you could earn steady passive income, look no further than Bria Homes.
BRIA Homes is a subsidiary of GOLDEN MV Holdings, Inc., one of the largest real estate companies in the country. BRIA Homes is primed to bring quality and affordable house and lot packages and condominium units closer to ordinary Filipino families. This is the goal that drives every single employee in the company, for which the ultimate fulfillment is seeing a client happily moving into BRIA’s homes.
To know more, visit their website at www.bria.com.ph, like and follow “Bria Homes, Inc.” on Facebook, Twitter, Instagram, YouTube, Pinterest, Spotify, Viber Community, Telegram Channel, Kakao Talk, LINE and WhatsApp, or call 0939-887-9637.
